My colleague Tom Hazlett and the always-insightful George Bittlingmayer offer excellent reasons why it is a (Keynesian) superstition to believe that today's so-called "stimulus" spending will help the economy. Here are a sample couple of paragraphs:
If historic U.S. budget deficits are any indication, the economy is
already âstimulated.â The predicted 2009 federal deficit stood at 8.3%
of GDP before Obamaâs package sent it to about 12%. This is a stunning
level of debt, double the previous post WWII high when Reaganâs 1983
budget deficit amounted to 6% of GDP. That time around, the 10.8%
unemployment rate, the worst since the Great Depression, was soon
reversed.
already âstimulated.â The predicted 2009 federal deficit stood at 8.3%
of GDP before Obamaâs package sent it to about 12%. This is a stunning
level of debt, double the previous post WWII high when Reaganâs 1983
budget deficit amounted to 6% of GDP. That time around, the 10.8%
unemployment rate, the worst since the Great Depression, was soon
reversed.
Keynesians claim that the Reagan boom was an outcome of just this
deficit strategy; for sake of argument, let us assume the Keynesian
position. Reaganâs budget deficit, half the size of Obamaâs as a
fraction of GDP, was able to pull the economy out of an unemployment
trough deeper than the 7.6% hole weâre in today.
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Unfortunately for the Keynesians (and all of us taxpayers!), the 1983 budget provides no support for their position whatsoever. If one had to find a comparison for the current action, it would be 1933-35 Roosevelt not 1983 Reagan.
In 1983, the budget deficit was caused by maintenance of prevailing government spending in the face of significant cuts in income and capital gains taxes. Those tax cuts coupled with deregulation of key economic sectors like transportation caused the economy to regain its footing and soldier on for the next 20 years. 1983 was primarily supply side economics and it worked.
I wish the same could be said for the porkulus bill that Obama just signed. It constitutes all new spending on top of the rapidly growing baseline government expenditures we have seen over the last decade. To make things worse, most of this additional money went toward supporting or enlarging existing government programs, with very few incentives for the private sector.
Reagan's actions broke private capital loose from the stagnant tax shelters of the 1970's. Roosevelt's actions kept private capital on the sidelines for a decade. We are already starting to see a replay of that result with the current unwillingness of capital to commit to the financial sector in the face of government tinkering. The fact that tax cuts and deregulation worked in 1983 while truly massive "aggregate demand" spending has not worked in 2008-2009 is just another argument against the practical application of Keynesian principle.
Market investors are wary of new spending, guaranteeing either future tax increases or inflation, as a run-up to the demographically guaranteed spending spiral.
Market participants are very schizophrenic about more spending. At first they love it because most spending represents a transfer of wealth from taxpayers to shareholders. Recently, the very news of stimulus passing can send the market up 2-14% (that has been the range as of last Autumn). A few days later, the market starts thinking about the fact that stimulus is a tax increase and an inefficient allocation of assets. At best, it's a one time gift to shareholders which does nothing to either improve the quality of earnings or offset the cost of the gift, which will ultimately be payed by shareholders who are taxpayers. That's when the market heads back down – usually to below where it was before the stimulus rumor or passage in congress.
Businesses borrow to invest in positive NPV projects. Business is currently pulling back and not investing because there are fewer positive NPV projects. By borrowing and spending, the government is essentially saying that it is either willing to invest in negative NPV projects (money losers) or it, as a single market participant, knows more than all market participants combined and the market is completely wrong about the number of positive NPV projects. Either way, it's ludicrous.
For those who suspect that government knows it's investing in negative NPV projects and is willing to do it to get elected, I would respond that I've had dealings with companies that must present to congress to get subsidies. It's both: they neither know nor care. The only thing they care about is getting re-elected so they may wield power and collect bribes.
Methinks – it's not ridiculous if you understand that the goal of Obama is to turn the USA into the USSR.
Who are they talking about when they say "Keynesians claim that the Reagan boom was an outcome of just this deficit strategy; for sake of argument, let us assume the Keynesian position."?
Mankiw or Woodford wouldn't say anything like that. What about Paul Krugman? Here is an excerpt from a column, "In the late 1970's most economists believed that eliminating the high inflation then prevailing in the United States would require inflicting a lot of pain: the economy would have to go through an extended period of high unemployment and depressed output. Once the inflation had been wrung out of the system, the unemployment rate could go back down. And that's exactly what happened. In fact, it's instructive to put a graph showing the actual track of unemployment and inflation during the 1980's next to a figure from a 1978-vintage textbook showing a hypothetical disinflation scenario; the two look almost identical.
Ronald Reagan didn't decide to inflict that pain. The architect of America's great disinflation was Paul Volcker, the Fed chairman. In fact, Mr. Volcker began the process in 1979, when he adopted the tight monetary policy that caused that record unemployment rate. He was also mainly responsible for the recovery that followed: it was his decision to loosen up on the money supply in the summer of 1982 that set the stage for the rebound a few months later."
Is there really dispute that this is not the standard story of 1979 to the late 80s? The monetary explanation spans from Friedman to Krugman, so who are the Keynesians they are referring to? Everytime I get linked to an article like this, that is just bizarrely out of the loop, I always look to the bottom to see what the professor's background is. It's never macro. In this case, it's finance and law. I looked a bit at their vita's and it seems to be all regulation and various anti-trust stuff. I'm sure they have great insights into those matters, but is it so much to ask to get macroeconomists to do macro? Is that such a strange demand?
After all the wrangling over statistics, it still makes no sense to drive productive enterprises to insolvency in order to save the unproductive from it.
And it certainly doesn't make any sense to let billionaire socialists and their front men talk us out of our money and our freedom.
dg lesvic – it makes perfect sense to the poverty mongers and the billionaire socialists to screw the middle class.
And now we know what "spreading the wealth around" really meant: welfare for billionaires.
Ronald Reagan didn't decide to inflict that pain.
Actually, Volcker asked for and got political support for his effort from Reagan (and from Carter before him). He needed the backing. Let's not indulge in the fiction that the Fed is impervious to political will.
Is there really dispute that this is not the standard story of 1979 to the late 80s?
Sure, that's the whole story if wish to ignore the changes in tax rates, and deregulation (deregulation also started with Carter).
I always look to the bottom to see what the professor's background is. It's never macro. In this case, it's finance and law.
Several of my finance professors as far back as undergrad were actually Ph.D.'s in Economics. Finance is merely a branch of economics anyway. In fact, it is a rather broad branch. I don't know why you have such blind faith in macro economists. Not all economists are very good at economics. Plus… As they say, micro economists are wrong about specific things, while macro economists are wrong in general
"… but is it so much to ask to get macroeconomists to do macro? Is that such a strange demand?"
Not too much to ask for. It's like asking an astrologist to do astrology.
If you want to know about the heavens, consult an astronomer, not an astrologist.
If you want to know about the economy, consult micro, not macro.
If you want to construct an even wager, pit an astrologer against macro-man.
And now we know what "spreading the wealth around" really meant: welfare for billionaires.
Posted by: dg lesvic | Feb 20, 2009 4:07:46 PM
I wish I could deny that, but it's true. Welfare for billionaires.
Methinks – you are an utter disgrace for not admitting it.
Obama thinks that every opportunity to borrow and spend will create wealth, so why not? Obama and the Democrats have announced that their policies are based on a 1.5 "economic multiplier" that will improve the economy. Does it matter that these leaders base their policies on a 70 year old, unproven, non-predictive Keynesian theory?
Possibly you will find this analysis useful. It might shake up some belief in the Keynesian nonsense the government is promoting.
It seems like a funny idea, but it follows directly from Obama's belief in Keynes' theory, so it isn't funny, it is an absurd consequence of the beliefs of Obama's economics team.
I think it is more than strange to believe that when the government buys 2 TV sets, the government gets 2 TV's and someone else gets one for free. A great deal. But, it is entirely due to miscounting transactions as being wealth.
If Obama (via Keynes) is correct, that there is a 1.5 wealth multiplier on spending, then $100 in spending produces $150 in wealth, and we should all benefit from counterfeiting.
Let's Counterfeit Our Way to Wealth
Where have I gone wrong? By believing Obama and Keynes. Maybe they don't care if they are wrong, as long as they get to spend the money.
Andrew – who cares about the niceties of economics. The political reality right now is that if you dare to disagree with Obama you are tarred and feathered as a racist. Pure and simple.
To Mezzanine,
Maybe we can start by tarring Keynes, Lawrence Summers, Tim Geithner, and any other rich white guy who supports the 1.5 multiplier. That is not racism.
We can remind Obama how disappointing it is to hang out with white guys and believe what they say.
Methinks – you are an utter disgrace for not admitting it.
huh? what? But if they ever found out I said that, I may not get my cut!!!
Yeah, Mezzanine, I point out a version of that every time I comment about regulation. That's why I keep my identity hidden
Although, I do think that dg forgot to mention that it also includes jobs for government functionaries like the super helpful folks at your DMV and post office.
I had a cat once whose favorite pastime was to sit by a faucet to watch the water drip out. He like to take swipes with his paw at the falling water. Some commenters on this blog remind me of that cat. So,
let's give the richest top few percent of the population the entire $800 billion stimulus and let's have fun watching it trickle down.
If I were young and energetic, I would study what percentage of the 800 billion ends up in the hands of billionaires. Because money is funneled upward to the richest in this sick, broken economy/society. I predict 50-75% of the money reaches the top mega-rich eventually -just where you guys and one so-called gal thinks it belongs.
Well since 70% of the income tax revenue in this country comes from the top 10% of tax payers, I see no problem with them getting 70% of the bailout money. Everyone has a right to the money that they have earned.
Ramanujan, you are another clone of that drippy cat I once had.
Because money is funneled upward to the richest in this sick, broken economy/society. I predict 50-75% of the money reaches the top mega-rich eventually -just where you guys and one so-called gal thinks it belongs.
But Trumpit, that's what government is for.
What, you thought government was supposed to be for the little guy.
Get real.
Let's not feed the troll.
"you are another clone of that drippy cat I once had."
I'm guessing, but seeing the intelligence of your other posts, he starved to death cause you had to eat all his food, right?
Yes , maximus , or is it really mindless minimus? You'll end up eating my cross-eyed cat's food and droppping if you keep believing in plutocracy under the guise of twisted Liberterianism. Get real, as Sam says.
Oh!of course I will, terdpit. I will be starving as I garden my extensive lands of gentry and spit at your poor starving corpse pounding at my gate for entrance. Sorry, Malthus said you need to die.
Ok, please. Let's not feed the troll.
Maximus, your 8:51 post made me laugh so hard I cried a little!
Methinks:
Glad I could help lighten your day. Gotta be tough working the market these days. As Clapton once sang " it's got to get better in a little while"!!!
You're part of the solution, not the problem. Too bad the trolls on this blog can't understand that.
Trumpit.
I'm not saying this to take swipes, but from an objective viewpoint.
The rich are getting the bailout. The rich are getting the bailout because they have political power. The rich have political power because they pay for the political system. If a politician had exactly as much to gain from a poor person as they did from a rich person, the rich person would have no more say in politics. Unfortunately, the nature of a progressive tax system is that rich people are more valuable to political entities than are poor people. It always confuses me why poor people argue for a progressive tax system. They are intentionally making themselves lower class citizens.
TrumPit, we oppose plutocracy, which is why we have to wonder why you are so willing to enable it.
By the the way, Tom Hazlett, or Thomas (Hollywood) Hazlett, as I liked to call him, was one of those early critics of my redistribution theory. His argument against it was exactly the same as that of Larry White and David Friedman.
Haven't had any luck getting those worthies to share their wisdom with us. Perhaps Hollywood will rush in where they dared not tread.
I'm still convinced that Trumpit is a satirist
"TrUmPiT: let's give the richest top few percent of the population the entire $800 billion stimulus and let's have fun watching it trickle down."
OTOH, We could give it to the poorest and watch it trickle up. This is an interesting experiment in trickle up economics, and I hope it works — but I have some serious doubts about demand-side economics.
I enjoy reading from the pro-liberty and free market embracing cats around here; even if I happen to see an occasional drip post his/her/its nonsense.
STrUmPiT doesn't understand his own scenario. His people, Obama, socialist et al. have control of the porkulus package entirely in their control. If it does not trickle down I guess, according to his writings, we blame Bush and the libertarians.
Makes sense to me.
why debate theory? If you want to know the future of America look to the UK from 1900 to 2009. Once a great empire with cutting edge technology that was the envy of the world to… Take a look. Today the UK is rife with cultural animosities, illegal aliens, a collapse in investment, a broken banking system, a falling currency and the burden of a long lost empire. If you want to know how it happened study history not economics, which is nothing more than ideology promoted by fools like academics and hucksters for their own gain like politicians and business people.
As one should recall the Dems controlled congress and refused to cut entitlement spending which led to the deficits. David Stockman, Reagan's budget director said that the cuts were needed to make the plan work. I wish that a man of Ronald Reagan's abilities and convictions was president now. He would identify the problem, grab the bull by the horn, encourage us by telling us that our best days are ahead, browbeat the socialist, and enlist the public to help. I know some of you will say Reagan's defense spending caused the deficit and it did but it also had a tremendous payoff when the USSR was defeated and we enjoyed a peace dividend not to mention freedom for hundreds of million of people worldwide! We are now protected, due to the insistence of Reagan, by a missile defense shield that has evolved into reality and is only getting better!
One might wish that the stupidities of the right and the left canceled out, instead, they seem to be additive.
Quote from Streetwise: "If you want to know about the heavens, consult an astronomer, not an astrologist.
If you want to know about the economy, consult micro, not macro.
If you want to construct an even wager, pit an astrologer against macro-man."
Hear, hear!
People forget that Reagan was a rock solid New Deal Democrat until the late 50s I am SAG and served on a board with him and while a solid anti-Communist, those views were the main reason for identifying him as a conservative. His other views were decidedly left of center in his early days. He was pro gay and civil rights and rallied the Guild to that cause, he favored some government programs throughout his governorship, and just flat didn't discuss many conservative ideas. None other than Barry Goldwater thought he was a communist. Had he been elected in 1952 he'd have been to the left of IKE.
Howard,
That's a very interesting story and it would be interesting to hear your personal impressions, but I fail to understand the point of your post. What does "pro gay" mean (I'm an "I don't care if you're gay", so I don't know if that's pro or anti)? And why do you think Republicans would start disliking Reagan if they knew (assuming they don't know) his pro civil rights stance when the governors of the states which opposed civil rights were Democrats? I'm not aware that conservatives and/or Republicans are particularly anti civil rights – despite that fictitious claim by the left. I did happen to know some of these things about Reagan, but I don't see how any of it is terribly relevant to his presidency. He was a believer in free markets and small government during his presidency and did more than any other president since Coolidge to reduce the size and scope of government. Thomas Sowell was a Marxist until he began working for the government after completing his Ph.D. Does that mean we should always be suspect of him? Does the fact that Hillary Clinton was an ardent supporter of Barry Goldwater and worked on his campaign make her less of a leftist today?
I can't tell you're just bringing up interesting factoids (which are interesting, btw) or if you're trying to make a point.
He was a believer in free markets and small government during his presidency and did more than any other president since Coolidge to reduce the size and scope of government.
Can you be more specific about Reagan's accomplishments in reducing the sized and scope of government?
I remember the RIF program, but I am not aware that the federal government actually shrank under RR. I remember him specifically saying on the tube during his campaign that he was not proposing to actually shrink government, but rather, to reduce the rate of increase. IOW, he was proposing less more government.
I do remember him talking about getting rid of the Dept. of Energy. Not much else.
I paid a lot of attention then, because that was the year I joined up with the libertarian party.
howard432 –
"His other views were decidedly left of center in his early days. He was pro gay and civil rights and rallied the Guild to that cause …"
I find it interesting that you consider a pro civil rights stand "decidedly left of center" — where does that come from?
Sam, he achieved the slowing of the growth of government during his term and that's a pretty big achievement for one guy working with a tax and spend democrat congress. Apparently, it's a huge achievement with a republican spend and spend congress too.